Lesson 5: Small Business, Entrepreneurship, and Franchises

What are four reasons why small businesses fail?

- Accumulating too much debt (cash flow is king) - Inadequate leadership/management - Poor planning - Unanticipated personal sacrifices

What are the three main risks of business ownership?

- lower than expected sales - higher than expected expenses - cash flow liquidity - not getting cash as quickly as expected (when customers pay on credit, cash doesn't come in as quickly - businesses have to have enough cash available to deal with day-to-day expenses

What are opportunity costs?

- opportunity in which the payoff is better than alternatives - best value of your time and investment

Sources of funding: One can use personal resources, which is the most common form of startup capital. Examples?

- savings - credit cards - equity from a home - funds from a retirement account - close friends who invest

When creating a business, what are the 3 questions to ask?

1. What need will be satisfied? What does the customer need? 2. Who is being satisfied? Who are the targeted customer groups/market? 3. How will customer need be satisfied? What technologies will be used?

What are the five characteristics of successful entrepreneurs?

1. confidence 2. energy 3. internal drive 4. vision 5. tolerance for uncertainty

A _______ is a license to operate an individually owned business as if it were part of a chain of outlets or stores. The business itself is usually called a _______. _____ is the granting of a franchise. The ________ is the individual or organization granting a franchise, while the _______ is a person or organization purchasing a franchise, like purchasing a tested and validated "business in a box."

A FRANCHISE is a license to operate an individually owned business as if it were part of a chain of outlets or stores. The business itself is usually called a FRANCHISE. FRANCHISING is the granting of a franchise. The FRANCHISOR is the individual or organization granting a franchise, while the FRANCHISEE is a person or organization purchasing a franchise, like purchasing a tested and validated "business in a box."

A business plan is a carefully constructed guide for a person starting a business created for the purposes of ______, ______ and ______. The document tells _____ _____ about the new business and shows whether a business has the potential to make a profit. It helps the owners track, monitor, and evaluate _________ by becoming a living document which is __________ over the course of the business. It also guides the owner through the various phases of business by identifying _____ to avoid and establishing ________.

A business plan is a carefully constructed guide for a person starting a business created for the purposes of COMMUNICATION, MANAGEMENT, and PLANNING. The document tells POTENTIAL INVESTORS about the new business and shows whether a business has the potential to make a profit. It helps the owners track, monitor, and evaluate PROGRESS by becoming a living document which is MODIFIED over the course of the business. It also guides the owner through the various phases of business by identifying OBSTACLES to avoid and establishing ALTERNATIVES.

Sources of funding: ________ ______ are private individuals who invest money in exchange for ownership in the company. In what scenarios would these investors become involved with a business?

Angel Investors - usually involved after business has shown sustained growth - look for companies with potential that may not receive bank loans - hope to sell ownership stake at some point for a profit - sometimes provide technical advice - usually individuals - must have a net worth minimum of at least $1 mil

__________ is the legal process by which a person or business, unable to meet financial obligations, is "relieved" of those debts by a court. In ____________, the party sells off all assets to pay creditors and closes down. In _____________, what business typically use, a repayment plan is used and they can try to stay in business. In ___________, which is only for individuals, a repayment plan can also be used.

BANKRUPTCY is the legal process by which a person or business, unable to meet financial obligations, is "relieved" of those debts by a court. In CHAPTER 7 LIQUIDATION, the party sells off all assets to pay creditors and closes down. In CHAPTER 11 REORGANIZATION, what business typically use, a repayment plan is used and they can try to stay in business. In CHAPTER 13 REORGANIZATION, which is only for individuals, a repayment plan can also be used.

_____________ is new form of funding that involves online financing sites where entrepreneurs go to post description s of their project or business and then invite people to contribute. Contributors don't receive _________ in the company but receive a reward. It is more like ____ than investments.

CROWDFUNDING is new form of funding that involves online financing sites where entrepreneurs go to post description s of their project or business and then invite people to contribute. Contributors don't receive OWNERSHIP in the company but receive a reward. It is more like DONATIONS than investments.

Components of a Business Plan: First is the _______ _______, which is an overview that justifies why the business will succeed. Next is ____ ____ & _____ ___, which provides a description of the product, what market gap it fills, who is the target market, and evidence of market demand. Next is the ____ ____, which includes strategies for pricing, distributing and promoting the product. Next is the _______ _____, which includes details about how the product will be produced and delivered to customers. Lastly, the ______ _________ give sales/cash flow forecasts, funding sources, and startup costs.

Components of a Business Plan: First is the EXECUTIVE SUMMARY, which is an overview that justifies why the business will succeed. Next is PRODUCT DESCRIPTION & MARKET ANALYSIS, which provides a description of the product, what market gap it fills, who is the target market, and evidence of market demand. Next is the MARKETING PLAN, which includes strategies for pricing, distributing and promoting the product. Next is the OPERATIONS PLAN, which includes details about how the product will be produced and delivered to customers. Lastly, the FINANCIAL PROJECTIONS give sales/cash flow forecasts, funding sources, and startup costs.

Downsides of Franchising: The _______ typically has to pay a fee to the franchisor, and pay a certain percentage of ____ ______ to the franchisor for the life of the business. The franchisee also has to pay for _________ the location, and the ______ _____ dictates every aspect of the business (no independent business decisions). Franchises also are not a guarantee of success.

Downsides of Franchising: The FRANCHISEE typically has to pay a fee to the franchisor, and pay a certain percentage of GROSS SALES to the franchisor for the life of the business. The franchisee also has to pay for BUILDING/REMODELING the location, and the FRANCHISE AGREEMENT dictates every aspect of the business (no independent business decisions). Franchises also are not a guarantee of success.

True or False: the average firm requires $800k in startup capital.

FALSE - more like $80k

In a franchising agreement, the franchisor and franchisee supply what?

Franchisor supplies... - A known and advertised business name - Management skills - The required training and material - The products and production methods for serving customers Franchisee supplies... - Labor and capital - Operates the franchised business - Agrees to abide by the provisions of the franchise agreement

Sources of funding: Companies that have become large and continue to grow can consider going PUBLIC by _____________. Why do only a small fraction of businesses do so?

Going Public: selling stock on the stock market - company is now subject to more regulatory requirements

_____ _____ is a source of financing for quite small business lacking access to traditional service. _______ _____ involves loans of very small amounts of money at low interest. Evidence supporting ability of micro-finance to lift people out of poverty is mixed.

MICRO-FINANCE is a source of financing for quite small business lacking access to traditional service. MICRO LENDING involves loans of very small amounts of money at low interest. Evidence supporting ability of micro-finance to lift people out of poverty is mixed.

Review pros and cons of franchising!!

Review pros and cons of franchising!!

Small businesses provide many vital contributions to our economy. They provide ______ _______ - more than half of major tech advances of 20th century originated in small business. They provide _______ and __________ collectively against larger firms, which pushes them to become more efficient and more responsive to ______ needs. They also meet the needs of ______ and larger __________, like providing access to basic services for consumers and businesses.

Small businesses provide many vital contributions to our economy. They provide TECHNOLOGICAL INNOVATION - more than half of major tech advances of 20th century originated in small business. They provide EMPLOYMENT and COMPETITION collectively against larger firms, which pushes them to become more efficient and more responsive to CUSTOMER needs. They also meet the needs of SOCIETY and larger ORGANIZATIONS, like providing access to basic services for consumers and businesses.

Sources of funding: ______ ________ become available as the business begins to grow. They mostly offer money for ________ and _____.

Sources of funding: BANK LOANS become available as the business begins to grow. They mostly offer money for EXPANSION and GROWTH.

The Small Business Administration defines a small business as one which is _________ owned and operated for a profit and is not ________ in its field. Domination in a field depends on the ________ - a company that makes millions and has several hundred employees still may not be dominant in its field. Annual average revenue must be less than _____ and the number of employees must be under _______.

The Small Business Administration defines a small business as one which is INDEPENDENTLY owned and operated for a profit and is not DOMINANT in its field. Domination in a field depends on the INDUSTRY - a company that makes millions and has several hundred employees still may not be dominant in its field. Annual average revenue must be less than $6.5mil and the number of employees must be under 500.

Sources of funding: _______ ________ _______ is sought by business with very high growth. How does this work?

Venture Capital Funding - VC funds raise large sums of money from private and institutional investors to invest in small companies that have the potential to become large and successful - VC's are extremely selective and access to funding is highly competitive - pressure on company to deliver fast growth - hope to invest in corporations to sell investment later for profit - usually groups of investors

What four questions are bankers and investors most interested in that a business plan should answer?

What exactly is the nature and mission of the new venture? Why is this new business a good idea? What are the goals and milestones for the business? How much will the new business cost?

What is the definition of entrepreneurship?

behavior behind new venture creation to commercially exploit (generally new) ideas or inventions

________ ______ is research and analysis of the business to uncover any hidden problems associated with it before buying the business. This involves hiring attorneys, going over old accounts, talking to suppliers, etc.

due diligence

Many companies look for _______ when hiring: employees who will bring an entrepreneurial spirit to their organization. This can also define someone who starts up a new ______ within an existent company.

intrapreneurs - starts up a new VENTURE within an existent company

What is the top reason for business failure?

lack of planning - lack of BUSINESS PLAN

What are the four P's of marketing?

price, product, promotion, place

What is the difference between small business and entrepreneurship?

small business can be existing businesses, while entrepreneurship is the introduction of a new venture created to commercially exploit new ideas or inventions

What is the biggest reason small businesses fail?

too much debt (cash flow issues)

True or False: Small businesses are typically managed by the people who started and own them.

true

True or False: Startup business usually have a limited ability to obtain capital - more financing options become available with a track record of increasing sales.

true

What are some possible motivations for starting a business?

- Irritated by working for someone else - Loss of a job and decision to start a business rather than seeking another job - An idea for a new product or a new way to sell an existing product - An opportunity to go into business as the result of a hobby that appears to have moneymaking potential - Hopes of becoming a large company

What are the three factors that have contributed to a large number of startups in the US economy?

- culture of entrepreneurship (pop culture, availability of info from government) - advances in technology - downsizing and outsourcing by US companies

What are the two most important parts of a business plan?

- executive summary - financial projections